Malaysian Islamic banks’ funding clean-up could take up to 5 years
Islamic banks need to strengthen their deposit base.
It may take between 3 to 5 years for Malaysia’s Islamic banks to improve their funding profiles, says S&P Global Ratings.
Islamic banks in the world's third largest Islamic banking market have funding profiles are highly sensitive to rate increases, as a result of their lower share of low-cost demand and savings deposits and higher share of costlier wholesale deposits, noted S&P Global Ratings credit analyst Nikita Anand.
Anand expects the funding profiles of Malaysia's Islamic banks to stay weaker than that of the overall sector, reflecting structural weakness in attracting low-cost retail deposits.
Profitability of Malaysia’s Islamic banks could also stay lower than the banking sector in 2024.
“Elevated deposit rates are exacerbated by intense competition for pricing household loans and financing in Malaysia's saturated banking sector. Islamic banks saw a sharper contraction in net financing margins in 2023. For standalone Islamic banks, funding risks may be higher,” Anand warned.
"In our view, Islamic bank subsidiaries of large banking groups are better positioned to manage this risk as they can benefit from intra-group funding," she added.
Furthermore, standalone Islamic banks are on a relatively weaker footing and may face a contraction in their market share, Anand warned.
It’s not without a solution, however: management actions could fix the problem, albeit gradually.
Banks also continue to ramp up efforts to grow Islamic deposits, according to S&P. To do so, banks are offering promotional rates, campaigns, better service, and ease of migration of low-cost demand and savings accounts from conventional to Islamic.
"The sector has also been gradually diversifying its funding sources; for example, by increasing funding from investment accounts," Anand said.